LGPS Deferred Debt Agreements – Five key points to consider

In September 2020, amendments were made to the Local Government Pension Scheme (LGPS) Regulations 2013 which enabled Deferred Debt Agreements (DDAs) to be entered into.

The introduction of DDAs sought to bring the LGPS in line with multi-employer schemes in the private sector where exit debts could already be deferred. The purpose of DDAs are to permit admitted employers to defer the requirement to meet their full exit liability when losing their last active member in a particular LGPS scheme, rather than having to pay this in full. However whether or not to enter into a DDA is at the discretion of each Fund.

Just over eighteen months on, we act for a number of clients seeking to mitigate their LGPS exit liabilities via DDAs. Drawing on this experience, we set out below five key points that should be considered by admitted employers thinking about a DDA.

1. Timing is everything. Where an admitted employer still has a number of active members with no immediate plans to cease future accrual, it is unlikely an LGPS fund will negotiate the detail of a DDA given the risk of circumstances materially changing prior to the last active member leaving and their liability crystallising.  However it is still worth an employer knowing what the Fund’s policy is as part of longer-term pensions strategy.
2. No guarantees. The legislation provides that a DDA can only be entered into once an admitted employer has already become an exiting employer in a particular LGPS Fund. This means an employer could exit an LGPS Fund and then not be able to secure a DDA on the terms they are seeking, leaving them to pay the liability in full. A “pre-agreement” in advance of an exit event is possible, however an LGPS Fund will always have the option to terminate such an agreement and not enter into the DDA should circumstances change. Notwithstanding this, a pre-agreement can be a useful record of the parties’ intentions and should give admitted employers some comfort that the DDA won’t be pulled off the table at a later date without good reason.
3. Affordability vs desirability of paying the deficit. Some Funds will not enter into DDA negotiations unless an admitted employer can show that they cannot afford to meet their exit liability.
4. Tying up security. Whilst most funding strategy statements reference the need for security, in our experience it has been possible to negotiate a DDA without security in some cases.
5. You win some you lose some. Prior to amendments being made to the LGPS Regulations to introduce DDAs, some Funds took the position that since it wasn’t expressly provided for within the Regulations then an agreement to defer an exit payment could not be entered into. Therefore the introduction of DDAs is an advantage with such Funds. However we have found that previously pragmatic funds are now adopting the position that because the Regulations provide for a solution to this issue, a DDA is the only form they will enter into.  This is a disadvantage where they would previously have been willing to commit to an arrangement before the employer’s last active member left.

For further information on DDAs or alternative risk mitigation strategies in the LGPS please contact Jane Bowen.